Odds Skew Against Investors in Bets on Strangers' Lives

In the summer of 2005, a firm called Life Partners Holdings Inc. said Marvin Aslett, an Idaho rancher 79 years old, had two to four years to live.

ENLARGE

Marvin Aslett, 84, has outlived a longevity estimate given to investors in his life insurance by Life Partners.
Charlie Litchfield for The Wall Street Journa

It didn't make this estimate on his behalf but for its customers. The company arranges to buy life-insurance policies from people like Mr. Aslett and sells fractional interests to investors, who collect the death benefits when the insured people die.

The investors in a $2 million policy on Mr. Aslett's life would have made a tidy return had he died as projected. But more than five years later, the rancher, now 84, says he runs on a treadmill, lifts weights and chops wood, adding that all of his grandparents lived well into their 90s.

"I'm healthy as a horse," he says. "There's going to be a lot of disappointed investors."

Life Partners, a fast-growing company in Waco, Texas, has made large fees from its life-insurance transactions while often significantly underestimating the life expectancies of people whose policies its customers invest in, a Wall Street Journal investigation found.

ENLARGE

Life Partners CEO Brian Pardo.
Life Partners Inc.

Life expectancies are a key factor in the business of investing in strangers' life insurance. If estimates are too low, investors face a double whammy: Their policy payout is delayed, and they must keep paying premiums as the person lives on. At Life Partners, according to the Journal investigation, the result is that 10% or 15% yearly returns promoted to investors may prove elusive for many.

Attractive projected returns for clients are part of the company's formula for success. Life Partners topped Fortune magazine's 2009 list of fastest-growing small companies in the U.S. In its fiscal year ended Feb. 28, it earned $29.4 million on $113 million of revenue, for a rich profit margin.

Life Partners' filings with the Texas Department of Insurance, obtained by the Journal under an open-records request, show that in policies old enough to provide a measure, the insured people usually haven't died within the life expectancy Life Partners gave its clients, and often were still living beyond double or triple their projected span.

ENLARGE

In 2002, for instance, Life Partners brokered investments in 297 life policies. Actuaries say if life-expectancy calculations on a group of people are well done, half should die by their projected dates. But in 95% of these policies, the insured was still alive at the end of the life expectancy the company supplied to investors. Policies brokered in 2003 and 2004 show similar patterns.

Brian Pardo, Life Partners' founder and chief executive, acknowledged that many of Life Partners' life-expectancy estimates "are probably wrong." It gets them from a doctor in Reno, Nev., who has testified for a court case that he never checks the accuracy of his prior predictions.

But Mr. Pardo said Life Partners prices policies to investors at a steep-enough discount to their face value to cushion the effect of any flawed estimate. Clients are warned the insured may not die within the time frame, he said, adding that even if an elderly insured lived 12 years, an investor would "still make as much as they would in a bank deposit."

He described the case of Mr. Aslett, the Idaho rancher, as "a good example of how the discounted purchase price of the policy counterbalances the risk of longer-than-estimated life," saying investors would still receive a respectable single-digit return if he lived to be 87.

The Journal also was able to review about 20 instances where specific individuals' longevity had been projected both by Life Partners and by independent firms that specialize in making such estimates. The independent firms' estimates were greater, generally by 50% to 100%.

In September 2008, for example, Life Partners sold its clients a $10.8 million policy on the life of a 78-year-old New York man, telling them he had a life expectancy of three to five years. Two independent firms earlier that year separately projected the man had about 11 years to live.

Mr. Pardo denied that Life Partners systematically attaches lower life expectancies than independent firms' estimates. He said the Journal's sample was too small and the firm has "numerous examples where our [life expectancy] is longer," some involving policies Life Partners didn't acquire for its clients.

Since its founding 19 years ago, Life Partners has sold its clients rights to the proceeds of 6,400 life-insurance policies with a total face value of $2.8 billion.

Clients pay a sum that covers the purchase price and Life Partners' fees, and put money in escrow to cover premiums during the insured's life expectancy. If the insured lives longer, investors owe more premiums.

Sean Turnbow, a Texas client, learned earlier this year he had to pay additional premiums on two fractional policies he bought in 2006. "It's started to make me nervous," he said. "I was under the impression that their physicians made very conservative estimates with life expectancies, and that doesn't appear to be the case at the moment."

Longevity Game

How Life Partners' business works

ENLARGE

Jacqueline Keller of Colorado Springs, Colo., said she is still paying premiums on pieces of two policies she bought in 1996 on AIDS patients. She said she had invested, in part, thinking this would help the original owners in their final months, but now, "every time I get a bill in the mail, I get ticked off."

Many find it offensive that people can invest in strangers' life insurance. "That you've got people out there betting—hoping—you will die soon is just a distasteful operation," says Joseph Belth, a professor emeritus of insurance at Indiana University. But the Supreme Court ruled in 1911 that life insurance was property people could sell.

A Securities and Exchange Commission task force in July suggested asking Congress to make such transactions subject to federal securities law, noting that "the SEC has brought a number of successful actions alleging fraud in connection with life-settlement securities." It said misrepresentation of life expectancies was an alleged problem in many cases.

When Life Partners acquires policies, there's a market price that is based partly on life expectancies that sellers' agents or potential buyers obtain from the independent life-expectancy-calculation firms.

Life Partners says it sometimes sees these predictions. In brokering these policies to its clients, however, it attaches a different life expectancy, the one from its Reno doctor.

In general, the lower the life expectancy on a policy, the more a firm like Life Partners can charge investors. Life Partners in October said its policies are "priced to target a compounded return of 12-14% at life expectancy."

In late 2005, a policy on the life of an 80-year-old California woman was available for purchase. Life Partners acquired the $1 million policy on behalf of its clients, paying $300,000, according to company filings in Texas.

It brokered the policy to the clients the same day for more than $492,000 plus five years of future premiums, an additional $58,000.

This spread is lower than typical. Mr. Pardo agreed with Journal estimates that on average, Life Partners sells a policy for about 2.4 times what the owner is paid, much of which goes to its own fees. In its most recent fiscal year, the firm reported receiving an average of $308,000 in fees from 201 policies sold.

Around the time this woman's policy was for sale, documents reviewed by the Journal show, two life-expectancy firms, AVS Underwriting and Fasano Associates, projected she had about 10 ½ years to live.

Life Partners told its investors she had three to five.

The woman, who at 85 has just exceeded Life Partners' longevity estimate, said in an interview she has "aches and pains" but is "reasonably healthy."

Mr. Pardo said a five-year expectancy on an 80-year-old was "not unreasonable," and the policy was priced so "even if the insured lived 11 years, the compounded return would be a little under 5%."

Life Partners doesn't tell clients about any longevity predictions besides its own.

Mr. Pardo, 68, is a college dropout who became a decorated Vietnam War helicopter gunship pilot. He started a solar-heating business, American Solar King, that became a stock-market favorite in the early 1980s. The renamed ASK Corp. later filed for bankruptcy, and in 1989 the SEC accused it and Mr. Pardo of overstating revenue and profits. He settled in 1991 without admitting or denying wrongdoing.

The same year, he moved into the nascent life-settlement industry by founding Life Partners. Mr. Pardo found himself in the SEC's sights again in 1994, when it charged his new firm with selling unregistered securities. Life Partners won a federal-court ruling that U.S. securities law didn't cover its products.

Since becoming wealthy—he holds about half of Life Partners' stock and owns a Lear jet—Mr. Pardo has taken on a variety of charitable causes, including the support of a female boxer from Austin who runs a gym that aids poor children.

Life Partners markets investments via a multi-tiered network of agents. Potential investors, mostly individuals, must attest they are financially sophisticated, and the minimum investment is $50,000 across multiple policies, Mr. Pardo said. They receive a "confidential case history" that includes the insured's last name, a brief medical history and the life-expectancy estimate. Commissions to sales agents, called licensees, are about 12% of the amount investors put in.

A news release from one licensee in 2008 said: "15%+ Return on Investment Still Available." Another's website includes a 2007 brochure citing an "average annualized ROI on actual payouts of 15.83%."

Such figures "exaggerate the return" because they include only matured policies, wrote Prof. Belth of Indiana in an insurance newsletter he publishes.

Mr. Pardo said Life Partners didn't approve those pitches. Still, he said, the 15% figure is "factual," and is useful to clients because it signals that returns on overall portfolios will be bolstered by early maturities. He said he is comfortable talking with clients about a portfolio return in the high single or low double digits.

Life Partners says its life-expectancy estimates have long been provided by Donald T. Cassidy, a cancer specialist in Reno. The physician described his work for the firm in a deposition two years ago.

Colorado securities regulators had charged in state court that Life Partners sold unregistered securities and didn't disclose "the rate in which [the insured] outlived their life expectancies." The company settled the case, agreeing to repurchase policies from certain state residents.

In his deposition in the case, Dr. Cassidy said Life Partners paid him a monthly retainer of $15,000, plus $500 for every policy bought by Life Partners clients. That translates to $270,000 annual pay for part-time work that has brought him more than $1.3 million since 2002, Life Partners confirmed.

Dr. Cassidy, who declined to be interviewed, testified that he reviewed case histories three days a week for Life Partners and it sent him 100 to 200 cases weekly. That translates to 33 to 66 per working day.

At life-expectancy firm Fasano Associates, doctors review an average of six a day, said Michael Fasano, president. "These are complex medical histories of older people," he said. Mr. Pardo said Dr. Cassidy is under no time pressure.

Though Dr. Cassidy has said he doesn't check the accuracy of his predictions, his track record can be pieced together from the filings in Texas.

In 2002, Life Partners put a life expectancy of two years or less on the insured person in a third of the 297 policies it sold, and four years or less on all but a handful. Most were listed as HIV-positive.

If the projections were accurate, almost all of those policies should have "matured," with the insured dead, by the end of 2009, but instead the insured had outlived the estimate in 283 of the 297 policies.

A total of 262 were still alive, of whom 64% had lived at least twice the life expectancy Life Partners gave them, and 34% at least triple.

In 2003, of 299 policies the firm brokered, the insured as of a year ago had lived past the Life Partners life expectancy in 279 instances.

"Dr. Cassidy's projections are largely far less than accurate," Mr. Pardo agreed in one email. He later contradicted that, saying the Journal had "misinterpreted" the statement as criticism of the oncologist's "superior" projections.

In the now-settled action, Colorado regulators accused Life Partners of not disclosing another risk: If any investors in a policy didn't pay additional premiums when asked, the policy could be cancelled. Life Partners says that isn't a risk because it either finds other buyers of the fractional interest or steps in and pays the premium itself. It says it has lent clients $6.9 million for such payments over 3 ½ years.

I think before judgement is made on this case one has to first wait and see what the appeal with the 5th circuit says about this case. The 5th circuit will rule from the record only. It is predicted to be overturned in Life Partners favor. I think you will find that truth will come out then from the record. You have to ask yourself if a conflict exists when the "Trustee" who signed an affidavit with the court stated he has no connections with this company, yet he actually still has a "active" lisensee agreement with LPI. You also have to ask if a conflict exsists by the "Trustee" when his company ASG, a life settlement company the same as LPI. The difference is ASG manages a multi million dollar portfolio and LPI manages a multi billion portfolio. Now you can figure out why such statements are being made. It's a springboard to success in the billions. This happens only if the court allows this trustee to change the beneficiary from the Independent escrow companys ATLES and PES to him. Currently the independent Escrow companies hold the money belonging to the investors. If the beneficiary is changed the money will belong to the "estate" in bankruptcy and the investors will loose in large per portions while the trustee gets 3% of the portfolio. You can do the math...an independent actuarial firm predicts the policies in this portfolio will mature in approximately 3 years. What this means to the Trustee is $30/million a year. Yeah now you are starting to get the picture. This new asset class (25 years old) is out performing Wall Street on a more consistent basis yielding higher interests not regulated by the SEC. Spells a direct target. (See Supreme Court of Texas Ruling and Rehearing. Ruling got the model of LPI wrong, rehearing points that out so the verdict is still out on if LPI is a security or not. Federal courts say they are not.) lots remain to be seen on exactly what the TRUTH is. Funny part is the claim made by the trustee that a scam to defraud investors exsists when 98% of the investors are happy. See attached video

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.